Treasury Pick Lew Faces Questions on Citigroup, Medicare

U.S. Treasury Secretary Nominee Jack Lew, President Barack Obama’s former chief of staff and ex-director of the Office of Management and Budget, worked as a Citigroup executive from 2006 before joining the Obama administration at the State Department in 2009. Photographer: Joshua Roberts/Bloomberg

Feb. 12 (Bloomberg) -- U.S. Treasury secretary nominee Jack
Lew faces questions about his work at Citigroup Inc. and an
investment in a Cayman Islands fund from senators who will also
ask him about ways to cut Medicare spending and the country’s
debt.

Lew, picked by President Barack Obama last month to succeed
Timothy F. Geithner, will testify before the Democratic-controlled Senate Finance Committee tomorrow.

“Republicans aren’t exactly thrilled with him, but, at the
same time, they weren’t thrilled with Geithner either,” Mark
Calabria, director of financial-regulation studies at the Cato
Institute in Washington, said in an interview. “There’ll be a
lot of pressure on ‘where is your expertise in the financial
markets,’ and, you know, certainly the Citibank on the resume
doesn’t help.”

Still, Calabria says he expects Lew to be confirmed. That
would immediately propel him to the forefront of talks between
Obama and Congress over the $1.2 trillion in spending reductions
that are set to take effect March 1, and make him a key player
in longer-term projects such as revising the federal tax code.

“We have a tremendous amount of work to do over the next
couple months to get our fiscal house in order,” Finance
Committee Chairman Max Baucus, a Democrat from Montana, said in
an e-mailed statement on Feb. 6. “It is my hope that -- after a
thorough vetting process -- Jack Lew will be quickly confirmed
so he can help tackle our country’s pressing economic issues.”

Citigroup Executive

Lew, 57, Obama’s former chief of staff and ex-director of
the Office of Management and Budget, worked as a Citigroup
executive from 2006 before joining the Obama administration at
the State Department in 2009. His tenure at New York-based
Citigroup overlapped with the U.S. government’s $45 billion
bailout during the 2008 global crisis. Citigroup later repaid
the government funds.

“We need a better understanding of his role at Citigroup,
what his knowledge is of financial markets, whether he supports
reforming our tax code,” Senator Orrin Hatch of Utah, the top
Republican on the Finance Committee, said in a Feb. 6 statement.
“I will not decide whether or not to support his nomination
until those questions are answered.”

Some Republicans might see Lew’s Wall Street experience as
an indication he would favor government help for failing
financial institutions, said Calabria of the Cato Institute, who
is a former aide to Republicans on the Senate Banking Committee.

Financial Crisis

Lew served as managing director and chief operating officer
of Citi Global Wealth Management. In 2008 he moved to Citi
Alternative Investments, which managed billions of dollars in
private-equity and hedge-fund investments, some of which were
under pressure as the financial crisis neared. A group of the
unit’s municipal bond funds lost most of their value that year,
placing the bank at the center of a regulatory probe and a wave
of litigation from investors.

Lew will be questioned about his investment in a Cayman
Islands fund located in a building known as a home for offshore
tax havens that President Obama criticized during his 2008
campaign, Iowa Republican Senator Charles Grassley said Feb. 8.
Lew had between $50,001 and $100,000 in the Citigroup fund based
in Ugland House, according to a 2009 financial disclosure form.

White House spokesman Eric Schultz responded by saying that
Lew’s investment in the Cayman Islands fund is “not news to the
Senate.”

“Jack Lew paid all of his taxes and reported all of the
income, gains and losses from the investment on his tax
returns,” Schultz said in a statement. “He played no role in
creating, managing or operating the fund and he sold his
investment in 2010 at a net loss.”

Budget Chief

During Lew’s earlier tenure as budget chief under President
Bill Clinton, the U.S. ran a surplus for three consecutive
years. Tomorrow Lew will probably face questions on how to limit
entitlement programs.

“The big gorilla in our living room is Medicare, Social
Security, Medicaid,” said Senator Johnny Isakson, a Republican
from Georgia and a member of the Finance Committee. “I would
hope he would begin by looking at ways to reduce the deficit
and, over time, reduce the debt and get into reforming our tax
code and reforming our entitlements.”

The annual cost of Medicare, the health insurance program
for senior citizens, is likely to almost double to $1.08
trillion in 2023 from $551 billion in 2012, the Congressional
Budget Office said on Feb. 5. Congress is still wrestling with
the nation’s legally set $16.4 trillion debt limit, which was
suspended through May 18 to give lawmakers time to act.

Dodd-Frank

If he is confirmed by the full Senate, Lew would also help
oversee the Dodd-Frank Act, which revises regulation of the
financial system. Lew acknowledged regulation isn’t his
strongest suit when asked by Senator Bernie Sanders, a Vermont
independent, in 2010 whether deregulation of Wall Street
contributed to the economic crisis.

“I would defer to others who are more expert about the
industry to try and parse it better,” Lew replied. Sanders said
he opposes Lew becoming Treasury secretary, because of his Wall
Street connection.

“We need a Treasury secretary who will work hard to break
up too-big-to-fail financial institutions so that Wall Street
cannot cause another massive financial crisis,” Sanders said on
Jan. 10.

Financial Stability

As the head of the Treasury Department, Lew would lead the
Financial Stability Oversight Council, created under the Dodd-Frank law. The body of regulators is currently pressing the
Securities and Exchange Commission to revise regulation of money
market mutual funds, and working to identify nonbank financial
companies that could pose a threat to U.S. financial stability.

While Lew is recognized for his knowledge of domestic
finance, Republicans at tomorrow’s hearing may ask him about
international issues, seeking his weaker points, according to G.
William Hoagland, senior vice president at the Washington-based
Bipartisan Policy Center. Hoagland worked with Lew from 1997 to
1999.

“It’s fair game for particularly the Senate Finance
Committee Republicans to be raising these questions about not
just China, but Japanese, the yen and the euro,” he said.